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Workers who put some of their wages into tax-deferred savings accounts for medical expenses may
be in for a surprise if they lose their job: Their contributions could make them ineligible for
unemployment benefits or reduce their benefits.

The Ohio Supreme Court, in a 5-2 ruling this week, upheld several decisions that found that a
former property caretaker for Wakefield Educational Foundation in southwestern Ohio was not
eligible for unemployment benefits when she was fired from her job in December 2009.

In 2009, Claudia Bernard put $10,800 of her $17,320 salary into an account so that she could use
the money for tax-free reimbursement of her medical expenses.

She applied for unemployment benefits after she lost her job, but her claim was denied because
her contributions to the medical savings account pushed her average weekly pay below the state
minimum to draw benefits.

State law does not count money put into such accounts as income.

Excluding the money she put into the account, Bernard’s average weekly pay was $125; she needed
to earn at least $213 a week during the eligible time period to qualify for benefits, according to
the court’s ruling. The current minimum is $230 a week.

The ruling also could affect those who are eligible for benefits, said Tony Alexander of Burton
Law, one of Bernard’s attorneys.

Workers who do qualify for compensation could receive lower benefits than they otherwise might,
he said. Medical-account contributions would reduce their income, and income levels are a factor in
determining the amount of benefits, he said.

He said the ruling also could apply to other similar tax-deferred accounts meant for things like
providing care for children.

Alexander said he doubts that many workers and the companies they work for have any idea that
their workers could lose unemployment benefits or end up with reduced benefits by taking advantage
of that kind of tax break.

“It’s certainly a shock, and the reason it’s shocking is because people don’t know,” Alexander
said.

The court, in a ruling written by Justice Judith Ann Lanzinger, said interpreting state law to
exclude the $10,800 from wages “for unemployment purposes seems quite reasonable.”

In his dissent, Justice Paul Pfeifer said the issue is more complicated than it should be.

“To me, compensation is compensation,” he wrote. “Under this simple approach, Bernard’s request
for unemployment benefits would be based on her total compensation, not just the portion of her
compensation that was taxable.”

State officials were pleased with the ruling.

“We work really hard to determine eligibility very carefully,” said Ben Johnson, a spokesman for
the Ohio Department of Job and Family Services.

The Ohio attorney general’s office, which represented the state in the dispute, also was happy
with the outcome.

“We are pleased that the Ohio Supreme Court agreed with our argument that money deposited into a
medical savings account does not count when calculating unemployment compensation,” said Lisa
Peterson Hackley, a spokesman for the office.

Mike Smalz, a senior attorney with the Ohio Poverty Law Center, said the ruling could make it
even harder for workers to qualify for unemployment benefits.

“It’s already a high hurdle, and this decision is going to compound it,” he said.